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5 Key Philosophies for Long Term Investing Success

This is a repost from July 2014.  I was going to write a similar article this past weekend, but decided to pull this one out instead with a couple of extra points to the article.  I hope you enjoy!

Over the years, I have received a number of emails from people just starting their investing journey on how to invest.  More often than not, beginners ask which stocks they should buy.  There is much more to investing than just picking stocks.  In fact, I believe that starting out with individual stocks is a mistake and simply too much work (and risk) for rookies.

From my experience with investing, there are several overarching investment philosophies to increase your chances of long term success.  I believe that following the investment rules below will result in more money in your nest egg.

Invest for the long term

You may have heard the mantra to “buy and hold” your stocks, ETFS and/or mutual funds and there is good reason for that.   History has shown that the broad stock market (S&P500) has never lost money over any 20 year period (even after inflation).  You would think that the 20 year periods that include the great depression, super inflation 80’s, or the credit crisis would have been terrible for investors.  However, providing that they held through the period, their portfolios would have grown adjusted for inflation.  The longer you hold, the better it gets as the 30 year period returns are even better.

What I also like about the concept of buying and the\holding is that it eliminates second decision of selling.  Remember, when you trade in and out of stocks, you need to make two decisions.  The first is the easy one, buying.  The second, which is much harder, is deciding when to sell.  Unless you plan on doing a lot of your own stock research and watching stock charts regularly then buying and holding for the long term is your best bet.

If you have the urge to trade in and out of stocks, then why not set aside a small amount of  “play” money strictly for trading.  I have some USD set aside just for this purpose where I play with high beta momentum stocks.

Reduce your Management Expense Ratio (MER)

You may have read the articles about Canadians paying very high fees for their mutual funds.  A MER is the fee a mutual fund charges for the privilege of owning it.  While the MER does not come out of pocket, it comes out of the fund returns.  Funny thing is that most mutual funds do not beat their respective indices (ie. canadian equity fund vs. canadian index) after their fees.  Mutual funds do even worse if you look at long term performance.

While one or two percentage points do not sound like a big deal, it can have a significant impact on your overall portfolio size over the long term.  Reducing your MER from 2% to 0.3% can result in a portfolio that is 60% bigger at the end of 30 years.  Yes, that’s right, 60%.

Stick to an Investment Strategy

This point ties the above investment philosophies nicely.  I have a couple favorite investment strategies – index investing and investing for income via dividend growth investing.  Sticking to a proven long term investment strategy will help you keep your eye on the ball, help prevent too much churn (too much selling) at the wrong time, and help reduce taxes.

I commonly recommend that investors index their portfolio.  Indexing is a passive way to buy the broad stock market (own thousands of stocks) without having to actively pick individual stocks. By simply betting on the whole market,  statistics show that indexing will beat most active mutual funds over the long term.

Picking index mutual funds, like TD e-series, will bring your total portfolio MER down to between 0.35% and 0.50%.  Even regular, run of the mill index funds will have a MER around 1% which is much better than active funds that charge 2% or more.

The best solution for indexing is by using ETFs due to their low fees.  For example, iShares XIC covers the Canadian market and charges only 0.05%.  Vanguard’s VTI, which covers the entire US market, also has a minuscule MER of 0.05%.  Throw in an international index ETF and a bond index and you have yourself a very low cost portfolio (examples of index ETF portfolios).

While many of my articles are about dividend investing through buying individual stocks, much of our overall portfolio is indexed.  Our indexed portfolios include our family RESP for two children, my wife’s RRSP, and the international exposure in my RRSP.  We are in the process of opening a new non-registered account for my wife, which will also be indexed using ETFs.

Reduce your Trading Fees

While not as significant as reducing your MER, reducing your trading fees can make a difference to the overall return of your portfolio, especially when you are just starting out.

How do you reduce your trading fees?  By picking the right discount brokerage.  Pick one that doesn’t charge you annual fees, and offers low trading commissions even with a low balance.  As well, look for a brokerage that will reduce your foreign exchange (FX) costs.  One way to keep FX costs low is via DLR/DLR.U trading combination.  You can read more about DLR here.

ETFs are traded like a stock, so buying and selling typically incur a trading commission.  With the competition between brokerages rising, some brokerages are offering free ETF trading.  The brokerages that offer free ETF trading include Scotia iTrade, Virtual Brokers, QTrade and Questrade.  We have a number of accounts and still recommend Questrade for the investor that is just starting out with a low balance.

Here is a complete comparison of discount brokerages for Canadians.

Reduce your Taxes

While investing decisions should not be for tax reasons alone, taxes need to be taken into consideration.  Even those who only plan to invest in tax sheltered accounts (RRSP/TFSA) need to understand tax efficiency.  In this case, an important point to remember is that US dividends face a withholding tax within a TFSA, so best to keep US and international equities in an RRSP.

What about the high savers who have more savings than contribution room?  That’s where non-registered accounts come into play, and where the tax efficient placement of investments is important. To learn more about the background of investment taxation, you can learn more about capital gains tax here, and interest tax here.

At a high level, the highest tax efficiency is if you keep all investments in tax sheltered accounts.  However, if you have outgrown your registered accounts, US equities, international equities and bonds are generally efficient within a RRSP.  Canadian REITS and bonds are efficient within a TFSA, and Canadian equities work well in non-registered accounts.  For more details, check out my article on which account to place your investments for maximum tax efficiency.

Final Thoughts

For a new investor, I realize that this can be a lot to take in.  The overarching theme to successful investing is to keep costs low, hold for the long term, keep it simple with index ETFs, and minimize your taxes.

There is a lot of investing experience in the MDJ readership, so please leave your tips in the comments.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 42 comments… add one }
  • SST July 28, 2014, 11:20 am

    There is a direct conflict in logic between “Invest for the Long Term” and “Index Your Portfolio”

    Mentioned is how the S&P500 has never lost value over 20 or 30 year time frames, including the Great Depression, yet an S&P index fund wasn’t available to the retail investor until 1976 — providing one 30-year and one 20-year period. A non-obscure Dow Jones index fund wasn’t available until 1998 — one 20-year period. A singular incident does not constitute a trend.

    Prior to the dates above the fees and taxes to replicate these funds would have eaten up a good chunk of any gains.

    Facts, not theories, are also essential for investing success.

  • FrugalTrader July 28, 2014, 11:43 am

    That’s interesting information, but the fact remains that the market over the long term has never lost money, even after inflation. You can review my post here:


  • SST July 28, 2014, 12:03 pm

    No, the FACTS are, retail investors have had ONE 30-year and ONE 20-year period in which to invest in an S&P500 index fund.

    Completely different than theoretical investment models.

    Calculate the real return of investing in the S&P500 pre-1977, as per your link, and I can guarantee you the fees and taxes will eradicate the CAGR.

    Eg. let’s say in 1960, 70% of the S&P companies paid dividend, that’s 350 dividend cheques you receive. Let’s assume no DRIPs available in 1960 and an average brokerage commission of $50. You pay $17,500 just to re-invest your couple hundred bucks (maybe) worth of dividends.

    Of course people will use whatever data they need to in order to support their choices and beliefs. I prefer facts.

  • FrugalTrader FrugalTrader July 28, 2014, 12:20 pm

    @SST, so are you saying that indexing is a bad idea today?

  • Evan July 28, 2014, 12:40 pm

    No, he’s just being argumentative as that’s his MO. He might prefer ‘devil’s advocate’.

    Nobody is so daft that they would spend $17,500 in commissions to revinvest a few hundred bucks in dividends.

  • Michael James July 28, 2014, 1:30 pm

    @FT: Great article. Very sound advice for beginning investors.

  • My Own Advisor July 28, 2014, 7:36 pm

    Excellent article FT.

    I agree with the themes, but I would also recommend rookies learn a bit, rather, a lot about what their goals are and who they are.

    They need to understand themselves and how they “tick” before jumping into products. The more you understand about you, who you are and what your goals, the faster you will reach them.


  • SST July 28, 2014, 9:22 pm

    “Argumentative” is now the label for opposing non-facts? Feel free to uphold all the myths you need, I prefer to dispel them hard and fast.

    Of course no one would spend that kind of money reinvesting dividends, that’s why pre-index stock data is completely bogus as it NEVER addresses fees or taxes.

    Four out the the five philosophies presented were either done so wrongly — invest for the long term, index your portfolio — or completely ignored — reduce your taxes, reduce your trading fees (in regards to any and all pre-index fund data; RRSPs have only been in existence for less than 60 years and TFSAs for barely 5).

    Not only that, but two philosophies are in direct opposition of each other: invest for the long term and reduce trading fees. If you invest for the long term then you aren’t trading and thus face minimal fees.

    Is indexing, now a fully fledged investing strategy, a good idea today? I don’t know. How did people invest and profit in the stock market during the 100 years prior to index funds?

    Being as that you are an engineer, FT, would you purchase a system or product which had been tested (to-failure or otherwise) only once? I wouldn’t.

    How many times do you think baby seats have been tested? Don’t see any stock market-like ‘may or may not fail’ disclaimers on those, do you? Why should you treat your money any differently?

    Indexing is perhaps a good store of value, but most likely not a wealth producer.

    Perhaps the most important on that list is concerning taxation, no matter what your investment — labour, stock, rental, etc.
    It’s how much you keep, after all.

  • Tawcan July 29, 2014, 2:57 am

    All great points. I’m always surprised that people are willing to pay high MER fee for mutual funds when you can get the same product by simply buying index funds.

    When it comes down to investing there are just too many people that jump into the boat without doing the proper research and educate themselves. I was certainly like this a few years ago. I listened to the bank financial advisor and bought bank tailored mutual funds with high MER fee. The financial advisor wasn’t looking out for me, he was looking out for himself!

  • Goldberg July 29, 2014, 10:03 am

    I usually like SST’s comments but this is silly. The fact is that the market has existed for a long time, we can track its historical return, and we can make a very simple assumption (as all economic theories do) that had it been possible to buy the index then, what rate of return we would have obtained. To argue the actual ETF has only been around for 20 yrs, and go off on taxes and fees (taxes and fees do not exist for other types of investments???) is missing the point completely.

    SST, you are not arguing only with FT, you are arguing against the Harvard and Oxford PhD’s and Nobel prize winners who agree this simple assumption makes sense. You will argue against gravity next?

  • Michael July 29, 2014, 3:00 pm

    I think SST comments have to be moderated. More often than not, they just annoy people. I only come to this site once in a while, but I’m thinking of not returning. “Indexing is perhaps a good store of value, but most likely not a wealth producer.” (yikes)

  • S July 29, 2014, 4:08 pm

    I’ve seen the merits of XIC and VTI discussed/mentioned on BNN. I don’t own any index ETFs and I can’t decide whether to divert cash away from my current strategy of just buying blue chip high dividend payers (simple and effective for income) to buy an index. Currently, taxation is the bane of my existence (heavy on the real estate) though an excellent accountant (a wise investment everyone!) helps alleviate much of the pain.

    Your comments usually inspire a lively debate but you can be a bit ornery at times.

  • Michael July 29, 2014, 6:52 pm

    I have been reader of the site for over 3 years but this is the first time I write a comment. I apology in advance for my horrible writing skill. English is my second language.

    I enjoy reading SST’s perspective about life and investing very much, especially when SST took on Ed Rempel’s. I lost count the number of times I read his personal journey about how he became Tropical Trader in his Simple Signal Trading website. I like it so much that I even copied the story into a word doc file to my local drive. Even though he took down the site now, I still can read it whenever I want. His story has been my inspiration ever since. I am trying to save and invest my money now so that I can travel like him and live a semi-retired life like him before 40.

    FrugalTrader, what can I say about you? You have changed my life. I have learned so much from reading your materials and guess comments here. I know by heart your stock picks in your Smith Manoeuvre account. I went ahead implementing the strategy myself in 2012 and have been successful with it. Without you and this site, I am no where I am today financially.

    I have an Aunt who live very simple/frugal life. She is a retired Professor from Laval University and lives in Quebec City her whole life. I always know she has a comfortable life but never realized she is so super rich until very recently. That was when I started having interest in finance and stock picking. The words came out, she knew I have interest so we talked more about it then I got to learn she has been a shareholder of Canadian public companies for more than half a century and what a journey that she has had.

    According to her, going with index guarantees you a mediocre return for life. For the majority who struggle to make the end meets and contribute to RRSP, that is probably the best outcome but if you have already had that much interest in reading balance sheets, cash flows, and annual reports, why not aiming for the best because at worst, your outcome would still be way better than indexing. She gave me this scenario which very is close to what she have done in her real investment life. Let’s say giving me the chance for 10 picks to buy and hold long term with 100k, what happen when 5 of them go bankrupt and 5 of them turn out okay. Does it mean I would lose half of my life saving? No, I just lost 50k investment on the 5 companies but another 50k successful investment would be giving me millions in return 30 years away from now. The lost from that 5 bankruptcy would be like 1% or less down the road. The longer you keep your investment, the bigger the return and the smaller percentage of the loss will be. This is from a retired lady with 8 digits asset. In case you wonder what she owns over half of the century, following by order starting from the 60s until the last one in late 90s: RY, MRU, BMO, ENB, BCE and last CMG ( Computer Modelling not Chipotle Mexican Grill). They are all Canadian Companies, right in front of us. Each of these positions has grown from the original low or high 5 digits to 7 digits in value. Just the dividend itself before selling any capital gains has made her to be in the top income tax bracket. Why CMG I asked? She knew about the company from a friend who has worked there. He eventually moved up to become a VP of Technology in the company and still there until now. Also at that point in her life, she simply could afford to lose on small cap picks. A winner or loser doesn’t change the picture of the outcome very much by then.

    The lesson I got from her is: no index, don’t over diversify, focus on the few bluest of the blue chip stocks. Only go for small cap later when I can afford to lose.

    With all due respect to Frugal Trader, I agree with my aunt and won’t use the index route.

  • MichaelQ July 29, 2014, 7:11 pm

    I just saw a comment from Michael at July 29th, 2014 at 3:00 pm, I am a different Michael.

    Let me address myself as MichaelQ

  • Kapitalust July 29, 2014, 9:09 pm

    Bravo, you essentially touched on everything important for the beginner investor!

    To truly even understand everything you stated, the beginning investor needs to read up on: 1) index funds, 2) stock market indicies, 3) stock market history, 4) economic history, 5) behavioural finance, 6) misc. finance.

    And all that can seem daunting to those who are starting but not interested to really learn and understand the craft. Which is a shame because you really lay it out in a easy to digest, bite size pieces.

  • Arun July 30, 2014, 7:40 pm

    Great advise for new investors.You already touched on everything.

    My advise is set a long term goal, and create a plan and stick with it. Choose right investment methond (index investing or dividend investing or etc) and stick with the method in bad and good time.

    Best of luck,

  • Eric August 1, 2014, 6:01 pm

    Thanks/Merci Michael for sharing your epic story.

  • The Wallet Doctor August 2, 2014, 5:26 pm

    I like your analysis of the holding your stocks scenario. Its interesting to see how most stocks don’t decrease over the long run. That of course would mean that you need to be investing in a way that you can handle waiting it out before getting back and improving your investment. It is easier to hold the ones you’ve got since that pesky selling decision is put off!

  • Ed Rempel August 2, 2014, 10:47 pm

    Hey FT. For me, I agree on 2, disagree on 2, and

  • Ed Rempel August 2, 2014, 10:56 pm

    Hey FT.

    For me, I agree on 2, disagree on 2, and 1 is not relevant.

    Investing long term and minimizing taxes are essential.

    I disagree on indexing & MERs. I would never be happy with index returns. And MERs are the cost of hiring a fund manager, so you have to evaluate the value of what you get. Lower fees may or may not help your returns, depending on your fund manager. My focus is on investing with the best possible fund managers, not the lowest paid fund managers!

    Trading costs are not relevant for me. Since I invest only in mutual funds and hedge funds, there are no trading costs. Of course the fund managers incur them and those that use a buy & hold strategy pay a lot less. Most of the best fund managers are buy & hold, but not all of them. Some trade a lot and are able to make it work.


  • R August 3, 2014, 12:36 pm

    I’ve read enough posts to know that you think outside the box and are against some of the mainstream investment ideas. So I have a general sense of what you’re against. But what kind of investing are you for? I’ll keep net worth’s out of it but going forward with new money what should these people do, here’s three scenarios:


    Married Couple, child on the way, and want 4 children total, late 20s
    $190,000 mortgage on a $250,000 house
    Household Income $100,000/year
    After Tax investable amount $25,000/year


    Married Couple, late 20s, no plans for children
    $20,000 in cash to invest
    Considering buying a $300,000 house with 5% down payment

    (don’t criticize the CMHC expense part, let’s assume that if you think buying a house is good, then the CMHC fees are acceptable. If you think buying a house is bad, don’t spend any time specifically bashing the CMHC part of buying a house.)

    Household Income $75,000/year
    If they keep their $1000/month rent apartment, they could have $12,000/year to invest.

    If they buy a $300,000 house, they’ll have only $5500/year to invest. But their mortgage will be paid down $8,500/year. And let’s assume that their house repairs are $1900/year. So that would make their $8500 in mortgage principle equal to their $8,500 in cash flow drain ($6,600/year more fixed expenses compared to the apartment + $1,900 in repairs). Yes, of course there’s eventually more repairs.


    Married couple, two children, early 30s
    Household Income $150,000
    $330,000 mortgage on $370,000 house
    Annual Investable amount $50,000/year

  • SST August 4, 2014, 12:52 am

    @R: all scenarios are rendered moot without more information — financial goal, current position, etc.

    Kind of like trying to figure out: 5 + x + y = z.

    @Ed: “Investing long term and minimizing taxes are essential. I disagree on indexing…I would never be happy with index returns.”

    (all this agreement is a bit unnerving!)

  • SST August 4, 2014, 12:53 am

    re: Michael #11: “I think SST comments have to be moderated. More often than not, they just annoy people. I only come to this site once in a while, but I’m thinking of not returning. “Indexing is perhaps a good store of value, but most likely not a wealth producer.” (yikes)”

    Moderated, why, Michael? I was unaware we live in Chinada.
    I give Frugal Trader the utmost respect for allowing Constitutional Freedom of Speech on his private property, even if it does “annoy people”. Apologies to the smooth water loving people.

    As for indexing being a wealth producer (as opposed to a mere store of value), do you have any research, data, factual proposition et al to uphold this claim, or is “yikes” all you can bring to the table?

    Since the stock market has been in operation and fully available to retail investors for over 200 years, and since stocks are a sure-fire producer of wealth, please enlighten me as to why after 200 years less than 1% of the nation’s populace are millionaires — that is, in possession of wealth.

    Or perhaps you can graph the growth of wealth among the retail investor class over the last almost-40 years of perfect index fund existence. Show me the wealth! :)

    (side note: a new report calculates Toronto as having the most true millionaires of all Canadian cities @2.26% of population. But…index funds! Wealth! Ummm….guess not.)

  • SST August 4, 2014, 12:54 am

    re: “I usually like SST’s comments but this is silly. The fact is that the market has existed for a long time, we can track its historical return, and we can make a very simple assumption (as all economic theories do) that had it been possible to buy the index then, what rate of return we would have obtained. To argue the actual ETF has only been around for 20 yrs…is missing the point completely.”

    The index theory can definitely be used to show historical market behaviour, or how the market worked. Think of index theory as tracking a school of fish…without a net. You can see how the mass moves and responds to different events, but without a net, your only take-away is observance — you have no way of capturing the benefit of all the fish. In other words, all theoretical index returns pre-index fund era are rendered useless in application to and calculations of historical-based forecasts and models. And with only <40 years of data, the index fund theory doesn't posses a whole lotta weight.
    I'll give you trend, barely; I won't give you return.

    re: "…and go off on taxes and fees (taxes and fees do not exist for other types of investments???)"

    Sure they do, but not like during the 175 years of non-index fund stock picking.
    Let's say I buy an apartment building. Every year I have to pay probably a management fee, land tax, and repairs. Doesn't bother me because as the landlord I build all these costs into the rents. I only face income tax. Compare that one single cost with trying to replicate an entire index inclusive of capital outlay, dividend and capital gain taxes, and commissions on buys, sell, and dividend reinvestments. I could have bought a hunk of gold 40 years ago, faced nearly zero fees, and gotten with 2% of index returns.

    re: "SST, you are not arguing only with FT, you are arguing against the Harvard and Oxford PhD’s and Nobel prize winners who agree this simple assumption makes sense."

    Let's see what Harvard and Oxford are doing, shall we?

    Harvard Endowment Fund (portfolio holdings; 2008–current)
    Public Equities: 34-33%
    Private Equity: 11-16%
    Natural Resources: 9-13%

    10-year & 20-year Returns
    Public: 10%, 11%
    Private: 9%, 22%

    Oxford Endowment Fund (portfolio holdings; 2008–current)
    Public Equities: 43-52%
    Private Equities: 2-16%

    Since Inception Returns (2008–current)
    Public Equities: 5.7%
    Private Equities: 9.5%

    Looks as though the Harvard and Oxford investment departments are ignoring their very own economic Philosopical Doctorates just as much as I am. Oops! Those who can't do….

    re: "You will argue against gravity next?"

    Nope. But then Physics is science, economics is not (just another reason why economic theories fail), so I hope you aren't lumping economics in with actual sciences. As well, read the headline, '5 Philosophies', not '5 Laws' as Philosophy is not a science, thus I can rail against these five all I like. YOU may embrace them, doesn't mean I must and certainly doesn't make them unrefutable Laws. At best, they brush up against Logic.

    Don't put the economic non-Nobel on a pedestal, either. The "Bank of Sweden Prize in Economic 'Sciences' " is, after all, an award invented by and paid for by bankers, for bankers; how trite. Einstein was proven wrong and he was a true scientist of true science. Thus if true science can be proven to be in error, I can only conclude a pseudo-science/voodoo craft like economics can be chock full of errors. And if you think any of today's psuedo-scientist tenured economists bear anywhere near the intellect or insight of an Einstein, you'd be very wrong.

    Real science doesn't require the crutch and shield of a government sanctioned failure-without-liability disclaimer as utilized by the financial industry.

    Take the current popular science which claims saturated fat causes obesity and heart disease. The public is hook, line, and sinker en masse. This claim has even been harnessed by the government which institutes and mandates the belief within the public school food system — even though the popular science is dead wrong. But because it's in the government and the public school system, you are supporting said wrong science with your tax dollars. You also pay to support the wrongful science with your tax dollars going into the health care system. Betcha don't care either way, right?

    You have no problems literally paying for this flawed science, yet you object when someone pokes holes in a precious piece of cheerleading masqueraded as infallible truth by the industry from which benefits the most? The moon is not made of cheese!

    The SEC even endorses 'buy-and-hold', thus another flawed "scientific theory" paid for by the tax payers.

    But then again, the government still fully sanctions the production and sale of cigarettes, an absolutely 100% destructive and harmful product with absolutely zero positive qualities.

    So I guess as long as someone (aka The Industry) makes money from the prevailing financial system, all is well and no need to question the status quo?

  • SST August 4, 2014, 12:54 am

    re: “The fact is that the market has existed for a long time, we can track its historical return…”

    The data used to complile this “long time historical return” is exceptionally flawed and thus rendered almost useless. Does anyone actually research what they read or do just take it all on good faith?

    re: “The fact remains that the market over the long term has never lost money, even after inflation.”

    A very important fact for the new investor is to distinguish between ‘The Market’ and ‘The Investor’. How many stock market investors lost money, on either side of inflation, during the the 175-year pre-index era?

    Why is there no financial industry research done to show real returns of investors in the pre-index fund market? Y’know, where investors had to pick and choose stocks for 175 years, hopefully hitting a home-run every now and again to make up for all the whiffs (and fees). As posted earlier, I’ll give you trend, I won’t give you return.

    How about asking these questions: What were the ‘5 Key Philosophies of Long-Term Investing PRE-Index Fund Era’? And why have they all of a sudden ceased to exist in the face of index funds?

    re:  “Indexing is a way to buy the broad stock market without having to pick individual stocks.”

    As an investor, if you agree to ‘buy-and-hold’ or even just buy an index, picking individual stocks is exactly what you are doing — picking 500 stocks out of 5,000. Not only that, but you are agreeing with and are willing to buy into such extreme valuations such as P/E 450. You wouldn’t buy a P/E 450 company on its own, so why accept it in a basket?

    You don’t need to invest in the entire index; it’s overkill by a magnitude of 50. If you are relying on the index to do all the hard and intelligent work for you, then invest in the best it selects.

    Out of FT’s listed factual 30-year periods, I took the top return, 1983-2013 with a taxed CAGR return of 8.42%. I then compared the return of buying and holding the top ten S&P stocks of 1983 over the same 30 years. Just ten would have given you a total return of 11.92% per year* — exclusive of reinvested dividends! This includes two of the holdings going bankrupt and another receiving a 1:2 merger split.
    *(probably much more than this if you consider the AT&T debacle, but I was not going to try and calculate that rats nets!)

    You could limit even more if you so choose, holding just the top 3 of the top 10 which provided 65% of the 30-year gains. These three stocks would have given you a 10.32% gain per year (before dividends) vs. the 8.42% of the entire index of 500. Seems to me there is an immense amount of dead weight in index investing.

    If you want to play ‘buy and hold’, then BUY AND HOLD!
    Your portfolio would be 187% larger at the end of the 30-year period by holding only the top 10 stocks of the initial year versus all 500 which continued to swap in and out for the entire period.

    Think Nifty Fifty, only better.

    As well, another huge gapping hole in the old Buy-And-Hold index philiospphy is the rate of return vs. rate of input. Using the 30-year return shows terrific returns but really only shows one thing: the rate of return on the money put into the market during the first year only.

    If you start young like most everyone tells you to do, that money most likely is not a lot. Using well-established earnings peak stats, your largest input years don’t have the befit of those juicy 30-year returns before you retire, it might be 10 or 5, which contain much more volatility. So as you progress toward your retirement, your returns on subsequent investments have a greater chance of lower returns. During your life-time, if you start early enough (most don’t), you only have ~30 30-year periods.

    What would be the risk-adjusted return of the above Top 10 strategy? No idea, I’m lazy that way. But then again, if you start young and with very little input, you can afford to, no…you MUST assume more risk than when you are five years from retirement with greater investment inputs. You need to have that risk on the smaller amount in order to boost the total dollar value returns to the same level as the low-risk/high investment combo. That is, unless you figure out a way to spend that first dollar last.

    Also unanswered is what happens if during your peak earning years the index is sitting at higher-than-median valuation levels (eg. 1997-2007)? Ignoring market timing puts the bulk of your money to buying expensive investments, perhaps leading to lower returns. Total return thus far on the 1997 vintage S&P index is 7.5% (~18 years). Thus to achieve just the average 30-yr return, the next 12 years will have to see a 17% average annual return. Good luck. Hope your buy-and-hold index strategy serves you well.

    Sure, my comments may be “ornery” but what makes me so is articles aimed at the “new investor”, “people just starting their investing journey”, and “beginners” which do the new investor a world of disservice by not putting forth factual, well-researched material, but instead provides effortless regurgitation. What the new investor is taking in is akin to the aforementioned forced school diet — best intentions but bad ingredients.

  • SST August 4, 2014, 12:29 pm

    re: “…we can make a very simple assumption (as all economic theories do) that had it been possible to buy the index then, what rate of return we would have obtained. To argue the actual ETF has only been around for 20 yrs…is missing the point completely.”

    “SST, you are not arguing only with FT, you are arguing against the Harvard and Oxford PhD’s…”

    Do Princeton PhD’s count for anything?

    “I guess an even bigger problem is that in the past no one could have even replicated the strategies because there were no index funds.” — Wade Pfau, CFA, PhD Economics (Princeton)

  • Michael August 4, 2014, 1:17 pm

    I think the idea of investing in a broad index ETF is based on the fact that most professional money managers and individual investors do not beat the broad equity index.

    If you have the knowledge and time to pick a basket of securities that you believe will beat the index, it is an investing approach. If you don’t have the knowledge or the interest, investing in ETFs is not a bad choice. Investing in mutual funds is not a bad choice either, but remember, most equity mutual funds lag the index so you are taking your chance on which funds you select. 70% to 85% of actively managed domestic equity funds perform no better than index funds or exchange-traded funds, according to fund raters Morningstar Canada.

    It would have to be true that the top 10 stocks in the last 30 years did a lot better than the index. That is hindsight knowledge. Choosing the top 10 stocks over the next 30 years is a whole different matter. I honestly don’t think anyone can do it and turn out right about it.

  • SST August 4, 2014, 2:05 pm

    @Michael: are you then agreeing index investing is not a wealth builder, merely a store of value?

    re: “It would have to be true that the top 10 stocks in the last 30 years did a lot better than the index. That is hindsight knowledge.”

    But what is being professed in this article is using the exact same “hindsight knowledge” to ‘buy-and-hold’ and ‘index your portfolio’. You now have knowledge of ‘Top Ten-ing Your Portfolio’, thus it is no longer hindsight.

    re: “Choosing the top 10 stocks over the next 30 years is a whole different matter. I honestly don’t think anyone can do it and turn out right about it.”

    Simple, on January 1, look at the Top 10 stocks of the S&P500 (or whatever index you choose), buy them. Done. That’s your investment activity for the year. As previously stated, let the index do all the hard work for you.

  • Ed Rempel August 6, 2014, 12:05 am

    @SST #22. You & I agree on 3 of the key points in this article? That is unnerving! :)


  • SST August 6, 2014, 10:30 pm
  • A Frugal Family's Journey August 11, 2014, 1:50 am

    Great Post Million Dollar Journey! While our blog often talks about our investments in individual dividend stocks, most of our investments our tied to index funds. We don’t talk about them because, quite frankly, they are just not that fun to talk about. :)

    I have started to build a dividend stocks portfolio whose dividends has grown quite nicely. But at the end of the day, we know that low cost index funds is our bread and butter.

    Wishing you continued success in your personal journey! AFFJ

  • SST August 12, 2014, 3:42 am

    re: “Index Your Portfolio — By simply betting on the whole market, statistics show that indexing will beat most active mutual funds over the long term.”

    Sungarden Investment Research did a study which provided the consistent conclusions: i) during the last two Bull markets, the index outperformed active funds by 80% and 63%, and ii) during the last two Bear markets, active funds outperformed the index by 66% and 62%.

    “When we averaged all 24 combinations of time frame and peer group, the index beat about 60% of funds.” — SIR

    The take-away?
    Be passive on the way up, be active on the way down.

  • Godlberg August 12, 2014, 10:27 am

    At SST #32. That’s interesting. Could it be that the index stays fully invested during the market fall while the fund sell part of its holdings and buys again once the market has become cheaper, therefore the gap is the difference?

    On the other hand, a person that sells when the market falls, likely fails to recognize the market is cheap and won’t buy at or near the bottom… the fund likely fails to recognize it as well but it must trade to justify its own existence… which in this specific case, is a good thing.

    I don’t know. But 60% is close to the mid range of 50%… so overall, the index guarantees you average return… the funds will either beat the index or do worst… SST, are you again! agreeing with Ed and is “super” fund manager concept… That would be a third time in short period that you guys get along philosophically. I think SST will work for Ed by years end. lol.

  • SST August 12, 2014, 11:44 am

    What the data shows is that active fund positions are never 100% long, thus they never reap the full Bull/Bear.

    What is not shown, however, is the degree to which the two beat each other, which is important, especially if you are paying for active management. Perhaps someone else has this data.

    In the world of finance, indexing is a mid-grade investment; it’s not lousy but neither is it stellar. I seem to recall someone saying indexing is a store of wealth, but not a wealth builder…

    p.s. — Ed doesn’t pay enough. ;)

  • Michael August 12, 2014, 12:28 pm

    Since 70% to 85% of actively managed domestic equity funds perform no better than index funds or exchange-traded funds (Morningstar), I would think that index funds will be more likely to build wealth than mutual funds.

    Unless you can select the mutual funds that will win … remembering that past performance does not necessarily determine future performance. I used to think I could pick the winners but I found out by experience that I could not. Just too hard to predict the future, even for the managers with good track records.

    I now have a diversified set of individual securities only, no EFTs or mutual funds. I might look at their contents for ideas, but that’s about it. I just want to own pieces of businesses that I understand and that I am willing to keep for a very long time. It is serving me well.

  • SST August 20, 2014, 10:43 pm

    Yet another interesting Index graphic:

    “Returns represent total annual return (reinvestment of all distributions)…”

    S&P = 4.28%
    AA = 7.41%
    Average of All Classes = 6.66%

    The above makes a good case for market timing, asset allocation, and active investing in general.

    If the average equity investment life-span is 30 years, and the average 30-year return for the S&P is ~10% per annum, and the current below-average streak represents ~50% of both eras…you better hope you’re raking in at least 16% total returns for the next 15 years running. Good luck.

    Also notice the Asset Allocated Index (AA) with only 15% of S&P and 60% of equities in total, yet is close to doubling the mid-range return of 100% S&P/equities.

    One asset not shown, gold — the antithesis of stocks — pulled down a total annual return of 11.2% over the same time period, more than 2.5 times that of the S&P. The other non-correlated asset, REITs, had a total annual return of almost 13%. Lost decade, indeed.

    Key Philosophy #6: There is a time and place for everything.

  • BeSmartRich April 12, 2016, 11:46 am

    Great summary. For those who are just starting out, buying a solid Vanguard ETFs are probably one of the best and easiest investing strategies.



  • mcgillickerr April 13, 2016, 9:25 pm

    Long time reader, first time poster. I’m hoping to get feedback from any and all on my newly created ETF investment plan. Once I set my target allocations I had a tough time choosing between so many similar ETF’s to meet each sector. I mostly considered MER’s, and volume. Since I have a DB pension I consider that my bond allocation and invest personally in 100% equities.

    Because I’m new I want to stick with only Canadian listings.

    For the US portion, my personal rule is I buy VUS (hedged) when CAD is <.75 and buy VUN (unhedged) when CAD is greater than .75

    US 40% – VUS, VUN
    Global Developed ex US 35% – VEE
    Canada 10% – XIC
    Emerging 10% – VEF
    Speculative individual stocks (moon shots) 5% – unused so far

    Thanks to FT and everyone for setting me on this journey!

    • FrugalTrader FrugalTrader April 13, 2016, 10:31 pm

      Looks sensible to me. One option that you can consider is to use XAW or VXC instead of VUS, VEE, and VEF. XAW for example will basically cover everything outside Canada for about 0.20% MER.

    • SST April 14, 2016, 12:30 am

      “Speculative individual stocks (moon shots) 5%”

      This makes absolutely zero sense.

      First, you must be convinced that index investing is the best strategy for your money…well, 95% of your money. So…where’s the logic in applying ‘not the best strategy’ to any portion of your money? It’s like knowing drinking tequila makes you barf but you keep slamming a shot at the end of every party on the off chance you don’t barf.

      Second, you must know by now that almost all data concludes only a very small percentage of investors beat index returns with any degree of regularity. With your approach you are admitting that you can’t beat the index 95% of the time, but the other 5% is all jackpot. If that’s the case, then why not throw 100% of your money into the 5% strategy? If it’s not the case, then why waste, literally, 5% of your money and subsequent returns?

      This is a very dissonant approach to personal portfolio management and I cringe every time I see it.

      You’re welcome.

  • Lost in Space April 16, 2016, 3:01 pm

    Stick to an investment strategy is one of those underrated gems and one of the key rules for those who have beat the market long term. Adjusting your strategy is normal going with the flavour of the day is a great way to loss money fast.

    One point I never understood about DGI investors is why they never take profits. Back in 2013 I bought either BMO or RY (can’t remember off hand) and sold it for a nice 20% profit but I sold it too soon, it eventually soured some 50% before coming back to the price I bought it at. Those who buy and hold left a substantial amount of money on the table, sure you got dividends but 4 dollars or so but you also left some $30 of profit on the table.


    • SST April 16, 2016, 4:06 pm

      DGIs don’t take profit because their long-term goal is income generation in retirement, and on that they focus, not capital gains.

      Your example demonstrates how difficult it is to time the market. Even though you took profits, you got it wrong.

      DGIs might be able to grow their dividend producing capital faster via buying and selling, but what is the risk?

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